'We Expect Accelerated Growth': Lake Street Sees Perfect Cannabis Play In GrowGeneration

GrowGeneration Corp. GRWG shares are up 54.34% year-to-date. 

The Analyst

Lake Street Capital Market’s Mark Smith initiated coverage of GrowGeneration with a Buy rating and $6.50 price target. 

The Thesis

Demand for cannabis products is rising, creating new opportunities for GrowGeneration, a supplier of growing equipment, Smith said in the Monday initiation note. (See his track record here.)

The analyst compared an investment in GrowGeneration to investments in Tractor Supply Company TSCO or Pool Corp. POOL at similar stages in their development, adding that both companies have been growth stock winners over a long period of time. 

Investors have been missing the following points about GrowGeneration, Smith said: 

• Consolidation Opportunity: GrowGeneration has advanced its business via acquisitions, and the analyst said it's possible the company will continue to consolidate and take share.
• Impressive Unit Returns: “The company has two primary means for unit growth, acquisitions and new store openings, and both provide strong cash-on-cash returns for shareholders.”
• Evolving Retail Strategy: The company has been experiencing growth in online sales, and through a partnership with Amazon.com, Inc. AMZN and improvements of its pickup and drop-ship capacities, it can turn into an omnichannel retailer, according to Lake Street. 
• Economies Of Scale Should Boost Profitability: “The company shifted to positive EBITDA in early 2019 and we project EBITDA margin of 8% in 2019 will grow to 10.6% in 2020 and can continue into the mid-teens as the company leverages corporate overhead and gains scale in purchasing and marketing.”

GrowGeneration is a dominant player in the hydroponic supply industry, with huge growth potential, Smith said. 

“The company has approximately doubled its revenue annually for the last two years and we expect accelerated growth in 2019. Additionally, the company has produced positive EBITDA the last two quarters and we expect the company to remain cash flow positive going forward.”

Price Action

The stock was up 9.07% at $4.21 at the close Monday. 

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